Retirees May Need Even More Money for Medical Expenses

By WSJ Staff

A 65-year-old couple who retires this year will need about $240,000 to cover their medical expenses in retirement, according to Fidelity Investments research released this week.

This year’s number is 6.7% higher than last year’s $225,000–and 50% higher than the $160,000 estimate in 2002, the first year Fidelity came up with a number. “These costs are going up at a faster rate than income,” says Sunit Patel, a senior vice president of Fidelity’s Consulting Services group. Higher costs for doctor visits, diagnostic tests and prescription drugs contributed to the increase, he adds.

Keep in mind that this eye-popping number is a lifetime estimate and assumes that the couple has no employer-provided retiree-health-care coverage, since many companies are phasing out that benefit. It also assumes life expectancies of 17 years for the husband and 20 years for the wife after retirement.

What’s even more sobering than the big chunk of money involved is what it covers-–and what it doesn’t. Mr. Patel says that 29% of those savings are needed by the average couple to pay premiums for Medicare Part B, which covers doctor visits and other outpatient costs, and the Medicare Part D prescription-drug plan. Another 41% goes toward Medicare copayments, deductibles and other cost-sharing provisions. The remaining 30% goes toward prescription-drug costs not covered by Medicare Part D.

But this estimate does not include over-the-counter medications, most dental services or long-term care–and those costs could quickly throw any budget out of whack. In 2008, the average annual rate for a private nursing-home room was $76,460–up 17% since 2004, according to Genworth Financial Inc., one of the country’s largest long-term-care insurers. In a separate study last year, Fidelity estimated that the average 65-year-old couple needs $85,000 to buy adequate long-term-care insurance.

To be sure, Fidelity, a giant financial-services company in Boston, benefits when workers squirrel away money in their retirement accounts. But one advocate for increasing retirement savings came up with an even-larger estimate–$635,000-–needed by a 65-year-old couple who wants a 90% probability of covering their health costs. That number, released last June by the nonprofit Employee Benefit Research Institute in Washington, assumes that the couple buys Medicare supplemental health coverage and must be prepared in case they become heavy users of prescription drugs. (They would need roughly half as much money if they were “mid-point” in terms of drug use.)

So, what to do so you don’t wind up spending hard-earned savings on health-care costs? “Whether it’s preretirement or postretirement, it is important to maintain your health status to the extent you can,” says Fidelity’s Patel. “We’re trying to help people understand that there’s a link between health behaviors–-eating a better diet, exercising more, not smoking, reducing stress–and potential financial consequences.”

Another goal is to get people to start thinking about retiree medical costs “as a separate and distinct savings goal, similar to what people might do when paying for their kids’ college,” he says.

Comments (3 of 3)

This is very gloomy news for boomers approaching retirement age, especially if one actually planned to cut back on full-time work any time soon. Where the money for this kind of expense is supposed to come from is a mystery to millions of boomers like me. Let's hope health reform efforts succeed in driving down costs of health care for all of us, that medical science finds cures for Alzheimer's and a host of other diseases, and that all of us take far better care for ourselves as we enter and enjoy the third age.

4:22 pm March 27, 2009

Brent Green wrote :

Kelly,

Clearly the Fidelity healthcare savings targets are ridiculously beyond financial capabilities of most Boomers. According to several research studies I've seen, at least 25% to 35% of Boomers have net assets of less than $10,000 today. Their financial prognosis is sickening. With one in five Americans over the age of 65 in 2020, the potential healthcare burden on taxpayers is going to be enormous.

Are there alternatives? Yes. Middle-class Boomers will find many of there own, including medical tourism, cooperative medicine and alternative healthcare modalities. The US healthcare system can expect to lose Boomer healthcare dollars to countries willing to deliver equivalent medical care for much less.

There's something "we the people" can do to prevent worst-case scenarios: provide access to healthcare coverage as partial compensation for national service to nonprofit and government sectors.

Nevertheless, many will die early because of lack of preventative care and adequate intervention. That's the final cost of the growing healthcare burden.

Brent Green

2:30 pm March 27, 2009

M. Lockwood wrote :

It's a little late for me to start squirreling that amount of money away at my age. However, the suggestions regarding maintaining a healthy lifestyle encouraged me. Good article.